Wednesday, February 26, 2014

Goldman Sachs Elevator Gossip

Hitting the news today is the "revelation" of the person behind the @GSElevator twitter feed.   The twitter feed is an insight into the minds of some of the Wolves of Wall Street.   Some quotes confirm all that you suspect is wrong about Wall Street, other quotes are brilliant.

A recent sampling;

And finally..

Tuesday, February 25, 2014

Rebalancing my portfolio

You'd think a that finance professor would be monitoring his portfolio daily... however this prof usually has better things to do.  That said, I have to admit that I've been neglecting my portfolio.  But tonight I did a thorough bit of house keeping.  I also learned a few things along the way.

Like most academics my retirement money is with TIAA-CREF, although the basic ideas are the same regardless of provider.

I have two primary goals - first to get all expenses ratios to be under 10 bp or 0.1%, and second to rebalance to 80% equities, 20% bonds.   The first goal is no brainer.  The second goal will either seem horribly aggressive or way too conservative depending on your perspective.  

Here's what I found.

1. Some fees are surprisingly high
I discovered that I had quite a few funds in my account that had expense ratios of 0.40-0.50%.  But there are options in the plan that have expense ratios of less than 0.1%.   What was I thinking!!!   It might seem small, but cutting 0.3% from my expense ratios is a non-trivial amount.  I won't share the details, but let's just say that it would pay for dining out every week of the year.

2. The choices are not the same across plans
I have four plans.  Two from my prior employer and two from my current employer.  For both employers there is an optional plan and the main plan.  The optional plans have much more choice.  For example they contain bond index funds and international index funds.   The main plans have limited choices.

3. I needed to rebalance
I only had 3% in bonds - because I haven't rebalanced in years.  Therefore I rebalanced my current portfolio as follows:
S&P 500 Index TISPX 50%
Bond Index TIBFX 20%
International Index TCIEX 16%
Small Cap Index TISBX 14%

Because of the differing choices across the plans, these rebalancings can't be done evenly.  For example, one plan was rebalanced entirely into bonds because it was a plan that offered the low cost bond index fund.

4. I needed to change future allocations
I set up my future contributions as follows:
S&P 500 Index TISPX 50%
Bond Index TIBFX 15%
International Index  TCIEX 15%
Small Cap Index TISBX 20%

This isn't ideal - I'd like more in international, but the main plan from my employer doesn't offer the international index fund.  So I have to use the 403(b) - which is a smaller contribution.

Grab a beer, glass of wine or your choice of beverage, sit down with a spreadsheet and take time to do a thorough inventory of your retirement portfolio.  Don't get hung up on choosing funds, instead focus on low cost funds that will deliver your desired stock/bond mix.

Note: despite my goal of getting all fees below 0.1%, I note that TIBFX has an expense ratio of 0.3%.

Buffet on indexing.

Mr. Buffet recommends indexing

Via: Andy Silton

Thursday, February 20, 2014

Facebook's purchase of Whatsapp...

A couple of divergent opinions on the latest shopping spree from Facebook.

Felix Salmon:
Zuckerberg will dominate the mobile market at any cost because he has almost bottomless pockets.

Kid Dynamite:
This looks like an April Fool's day deal.  FB has paid through the nose for people who by definition use Whatsapp because it is basically free.  It's Groupon all over.

I've given up trying to figure out whether what FB does makes any sense.  I note that as of today, the price of FB is trading close to $70.   My earlier prognostications about the stock being overvalued at IPO were wrong.   This is why I index - I am a useless stock picker, but to my credit, I know this.

NASDAQ is partying like it's 1999.

Tuesday, February 11, 2014

Rental Home Securitization

Rental homes are the latest in the long list of financial assets that are been securitized.  On one hand, having capital moving into the real estate market should help to reduce the backlog of foreclosed homes.  But on the other hand it is hard to ignore our past experience of securitization.   The spectre of house prices being bid up to a point that creates another bubble looms large.

Another concern, as indicated by the graphic in the article, is the high density of ownership by a single investor (in this case - Blackstone)

It seems as though Blackstone is trying to control the market in rental properties in some locales. There really can only be one reason for this - and that is to have sufficient market power to control the rental level in an urban region.

Planet Money vs MacroEcon Lectures

From the Counterparties Twitter Feed.

Monday, February 10, 2014

Hedge Fund TV

Brace yourselves -  Hedge Fund TV is coming.  

I won't be letting my kids watch - I don't want to pollute their minds.

Apple's $14bn share buyback

An article asks whether Apple's huge buyback could be better used - perhaps in developing new products.

The motivations for a buyback are complex (and responding to Karl Icahn's pressure may be one), but in terms of a simple IRR analysis, a buyback generates a return of about 3% + 0.8*5% = 7% for shareholders.  This is the expected return on AAPL stock (using the the CAPM).

While I am sure Apple has plenty of interesting research and development projects, it might be the case that returning money to shareholders so that they can invest it, rather than keeping it money market securities provides the best return.  Shareholders are then free to reinvest this money in other firms which might be seeking dollars to finance their R&D programs.

CAPM assumptions:
RF = 3%
Market Risk Premium = 5%
AAPL Beta = 0.8

Friday, February 7, 2014

Meat tax?

I've written before about pigovian taxes (i.e. carbon taxes).  These are taxes lobbied to reduce consumption of some item.  In the case of carbon taxes, they are designed to reduce fossil fuel consumptions.  Such a reduction would presumably have environmental benefits.  The key to such taxes is that they must be revenue neutral.  In other words, all revenue from them should be channeled back in the form of rebates or tax reductions elsewhere.  A good example would be a reduction in payroll taxes.

But here's a new take on the idea of pigovian taxes.  A meat tax.  The logic is simple - animals produce a lot of methane, and methane gas is a green house gas.  Therefore a policy that reduces methane emissions would be good for the environment.  

Personally I am all for it.  But then again, I don't eat meat.

Thursday, February 6, 2014

Buffet vs Hedge Funds.

In a 10 year, $1 million bet against a hedge fund manager, Warren Buffet put his money on an S&P 500 index fund.  We're now in year 6.  Guess who's ahead?

HT: Rob.

Tuesday, February 4, 2014

What determines research productivity in university departments?

A recent paper attempts to tackle this question and finds that the total citation count of the incoming department chair's research publications is a strong predictor of future departmental research output.

In other words, if you want to up your department's research, appoint high powered researcher as the chair.

Monday, February 3, 2014

Bob Dylan and American Cars.

I had to chuckle at Bob Dylan's nauseating super bowl commercial about Chrysler which gushed with American pride.  Clearly Bob ignores the fact that Chrysler is wholly owned by Fiat, and that of the top 10 American made cars, only one is a Chrysler product.

Hey BlueNC, there's a difference between underfunding and underperformance!

Recently, I was mentioned on BlueNC (a progressive website) in their Tuesday Twitter round up

I quote:

But university professors should know better than relying on safe tactics to back up their positions. North Carolina's pension plan weathered the storm admirably:
Year/Value of assets/Accrued liability/Unfunded liability/Funded ratio
2006 $68,808,403,000 $65,862,247,000 $(2,946,156,000) 104.47%
2007 $72,952,274,000 $70,573,970,000 $(2,378,304,000) 103.37%
2008 $73,124,299,000 $73,627,879,000 $503,580,000 99.32%
2009 $74,447,112,000 $76,976,542,000 $2,845,127,000 96.71%
2010 $76,599,104,000 $79,558,260,000 $2,959,156,000 96.28

Perhaps I can explain to the folks at BlueNC the difference between underperformance and underfunding.  

Underfunding happens when the state doesn't put enough money into the pension plan, or the plan lags its return assumption over a long period of time.

Underperformance can occur at anytime and is when the pension fund earns a return that is less than a reasonable benchmark.

The NC pension fund was slightly underfunded in 2008, but performed poorly in 2008.  Notably, the alternatives in the portfolio did terribly that year.  As the recent push into alternatives is supposed to mitigate downside risk, the 2008 data point is of great interest.   It shows clearly that alternatives don't deliver downside protection.

So BlueNC - there is a difference between underperformance and underfunding and this university professor knows exactly what he is talking about, unlike some other folks.

Professors charged with illegal shorting.

Two professors (from Florida State) are caught by the SEC for illegal naked shorting.   While they don't admit guilt, they did agree to pay a hefty fine.

Shorting isn't illegal, but naked shorting can be.  Naked shorting occurs when you sell a stock that you don't own and then fail to deliver the stock to the person you sold it to.


Sunday, February 2, 2014

Further thoughts on politics in the state pension fund.

Today, the N&O ran a letter from Ron Elmer that sharply criticizes Andy Silton's recent column about politics in the state pension fund.   I wrote about that here.

The N&O printed Elmer's letter and Silton's response.   Because neither are on the N&O website, I've linked to Silton's blog where he posted them.

Elmer's letter makes two simple points.
1. The pension fund is underfunded.   The amount it is underfunded is subject to debate, but it ranges from a little to a lot.  The reason for the variation is simply because in order to estimate how well funded a pension plan is, you must make assumptions.   The disagreements are all due to the assumptions.

That said, most people who understand the issue, and that includes Mr. Silton and Ms. Cowell, would probably concede that there is an underfunding problem.   This problem faces all states, thankfully, NC is in better shape than most.

2. The pension fund is underperforming.  Here is where it gets tricky.  Elmer argues that this is in part because of allocations to alternatives.  Silton, on the other hand says that the underperformance isn't actually underperformance per se - but a result of a more conservative strategy overall.  More conservative portfolios will have lower expected returns than more risky portfolios.

Here's my take:
1. Yes, the fund is underfunded.  This should be addressed immediately, but dealing with item 2, will help.

2. Assuming that Silton is correct, and that this is an asset allocation issue, then I would argue that the asset allocation is wrong.   The pension fund is too conservative.  But this is overly simplistic.  A better allocation would be one that has limited exposure to alternatives and instead focuses on more traditional investments while minimizing fees.   When the fees on the fund are running close to $400 million per year, reducing fees will have a big impact on helping that underperformance.

I commend both Ron Elmer and Andy Silton for engaging in an open, public discussion of this very important issue, although Silton's comment that Elmer looks like he's running for state treasurer again was a bit of a cheap shot.   Resorting to an ad hominem attack is a common strategy when you don't have facts to support your argument.